Feeble yuan signals tougher stance

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Feeble yuan signals tougher stance

It appears inevitable that the United States and China will fire their first salvos this week, with hopes for a truce to avert a trade war rapidly vanishing.
As financial markets here and in the mainland took a battering this week, the swift weakening in the yuan was eye-popping. Yesterday, the yuan fell past 6.7 against the US dollar - its weakest since the 2015-2016 slide - before recovering a...

Yi Jang and the People's Bank are overseeing a steady depreciation of the yuan.

It appears inevitable that the United States and China will fire their first salvos this week, with hopes for a truce to avert a trade war rapidly vanishing.

As financial markets here and in the mainland took a battering this week, the swift weakening in the yuan was eye-popping. Yesterday, the yuan fell past 6.7 against the US dollar - its weakest since the 2015-2016 slide - before recovering a little.

However, unlike the last dip, the drop this time was unprecedented, in the sense it had nothing to do with Beijing's policy to pave way for the yuan to be free-floating. While the depreciation back then was intended, it backfired so much that authorities had to make great efforts to reverse the downward expectation and capital exodus.

The yuan is weakening for a different reason this time around. While it's common for the currency to weaken when the American dollar strengthens, their recent movements have been disproportionate to each other. The yuan has fallen by a magnitude far greater than the greenback's gains. The yuan's slippage has also been across the board.

Could Beijing be stocking up on ammunition ahead of Friday's start of the trade war? A weaker yuan would help certainly boost exports.

In a trade war, nobody can actually claim to be a winner. While both the United States and China will suffer as a result, it's a matter of who may suffer more than the other. Economists project that both countries face comparable losses in economic growth.

That the mainland faces a huge price in fighting a defensive war is evident. A weakened yuan will have an impact on the stock markets, commodity prices and property bubble.

Worse still, it could spark a new wave of capital flight overseas.

Had a similar occurrence happened in the past, Beijing would have intervened with bold steps.

It's not as obvious this time - save for an appeal for calm by People's Bank of China governor Yi Gang. That said, it's always possible the central bank will step in to guide the yuan as the war unfolds.

It's clear China is toughening up after playing it soft with US President Donald Trump in the beginning. What's happening in Beijing is a policy shift, as Zhongnanhai policymakers are getting ready for shocks in the short term.

Thanks to the "one country, two systems," the SAR is in the same boat and will be affected. Not only will Hong Kong-owned factories in the mainland suffer, local property prices may also be stimulated due to money fleeing our way from the north.

Hongkongers must be prepared to make sacrifices for being part of "one country."

But the biggest fear of all is that no one knows the destination the trade war will lead everybody to.

While it's economically insane for the Americans to declare trade war with China, Europe and Canada, Trump is motivated by a political need to play the heavyweight bully.

Finding itself cornered, Beijing has no choice but to start counter-punching.